The Division of Clearing and Intermediary Oversight provided no-action relief to the general partner of a commodity pool from registering as a CPO under Section 4m(1) of the Commodity Exchange Act, and allowed an affi...

Summary: The Division of Clearing and Intermediary Oversight provided no-action relief to the general partner of a commodity pool from registering as a CPO under Section 4m(1) of the Commodity Exchange Act, and allowed an affiliated, registered CPO (“designee”) to serve as the CPO of the pool instead, where, among other things: (1) the general partner and the designee are under common ownership and control; (2) the general partner has delegated all of its management authority to the designee; (3) the general partner does not engage in the solicitation of investors for the pool and does not manage property of the pool; and (4) the general partner and designee executed and submitted to the Division a written acknowledgement of joint and several liability for any violation by either of them of the Act or the Commission’s regulations in connection with the operation of the pool.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5430

Facsimile: (202) 418-5547

aradhakrishnan@cftc.gov

Division of Clearing and

Intermediary Oversight

Ananda Radhakrishnan

Director

CFTC Letter No. 10-33

No-Action

September 21, 2010

Division of Clearing and Intermediary Oversight

Re: Section 4m(1); Request for CPO Registration No-Action Position for General

Partner of a Commodity Pool

Dear :

This is in response to your letter dated July 19, 2010 to the Division of Clearing and

Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the

“Commission”), as supplemented by a telephone conversation with you on August 4, 2010 and

email messages from your colleague, “A”, on August 4, 2010 and August 18, 2010 (collectively,

the “correspondence”)

Dear :

This is in response to your letter dated July 19, 2010 to the Division of Clearing and

Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the

“Commission”), as supplemented by a telephone conversation with you on August 4, 2010 and

email messages from your colleague, “A”, on August 4, 2010 and August 18, 2010 (collectively,

the “correspondence”). By the correspondence, you seek relief on behalf of “B” from the

requirement to register with the Commission as a commodity pool operator (“CPO”) under

Section 4m(1) of the Commodity Exchange Act (the “Act”)1 in connection with “B” serving as

the general partner of the Master Fund, such that “C”, a registered CPO, may serve as the Master

Fund’s CPO instead.

Based upon representations made in the correspondence, we understand the relevant facts

to be as follows. The Master Fund is organized as a Cayman Islands exempted limited

partnership. While “B” is the general partner, “B” has delegated all of its management authority

with respect to the Master Fund to “C”, the Master Fund’s investment manager and a registered

CPO. As explained in your letter, the structure is intended to provide more favorable tax

treatment by replacing the incentive fee paid to “C” at the Fund level with an equal incentive

allocation to be allocated to “B” at the Master Fund level.2

In support of your request you represent that:

1

7 U.S.C. §1 et seq. The Act can be accessed through the Commission’s website at

www.cftc.gov.

2

The incentive allocation paid to “B” will be taxed at the long-term capital gains rate

whereas an incentive fee paid to “C” would be taxed at the ordinary income tax rate.

allocation to be allocated to “B” at the Master Fund level.2

In support of your request you represent that:

1

7 U.S.C. §1 et seq. The Act can be accessed through the Commission’s website at

www.cftc.gov.

2

The incentive allocation paid to “B” will be taxed at the long-term capital gains rate

whereas an incentive fee paid to “C” would be taxed at the ordinary income tax rate.

Page 2

1. “B” and “C” are under common ownership and control.3

2. Pursuant to the Master Fund’s limited partnership agreement and its investment

management agreement with “C”, “B” has delegated all of its management authority to

“C”. “B” does not engage in the solicitation of investors for the Master Fund, nor does it

manage property of the Master Fund.

3. “C” is registered with the CFTC as a CPO, and the books and records of “B” are

maintained at the offices of “C”.

4. “B” has no employees or other persons acting on its behalf and it does not engage in any

other activities that are subject to the Act or Commission regulations.

5. “B” is not subject to a statutory disqualification under Section 8a(2) or 8a(3) of the Act.

In further support of your request, “B” and “C” have executed in writing an undertaking

to be jointly and severally liable for any violation of the Act or Commission regulations

committed by “B” or “C” while acting as general partner and/or CPO of the Master Fund.

Based upon the foregoing, and consistent with prior practice in this area,4 the Division

will not recommend that the Commission commence any enforcement action against “B” for

failure to register as a CPO under Section 4m(1) of the Act in connection with serving as the

general partner of the Master Fund. This position is, however, subject to the conditions that: (1)

“C” serves as the CPO of the Master Fund; and (2) “C” remains registered as a CPO

ctice in this area,4 the Division

will not recommend that the Commission commence any enforcement action against “B” for

failure to register as a CPO under Section 4m(1) of the Act in connection with serving as the

general partner of the Master Fund. This position is, however, subject to the conditions that: (1)

“C” serves as the CPO of the Master Fund; and (2) “C” remains registered as a CPO.

The relief issued by this letter does not excuse “B” from compliance with any other

applicable requirements contained in the Act or in the Commission’s regulations issued

thereunder. For example, it remains subject to all antifraud provisions of the Act and the

Commission’s regulations, as well as the reporting requirements for traders set forth in Parts 15,

18 and 19 of the Commission’s regulations, and all applicable provisions of Part 4, including

Regulations 4.20 and 4.41.5

This letter, and the position taken herein, are based upon the representations made to us

and are subject to compliance with the conditions stated above. Any different, changed or

omitted material facts or circumstances might render this letter void. In this regard, you must

notify the Division immediately in the event that the operations or activities of “B”, “C”, or the

Master Fund change in any material respect from those as represented to us. Further, this letter

and the position taken herein represent the view of this Division only, and do not necessarily

represent the position or view of the Commission or of any other office or division of the

Commission.

3

“D” owns 100% of “B” and 99.95% of “C”. “E” owns .05% of “C”.

4

See, e.g., CFTC Staff Letter 10-19 [Current Transfer Binder] Comm. Fut. L. Rep.

¶31,565 (May 5, 2010); CFTC Staff Letter 09-45 [Current Transfer Binder] Comm. Fut. L. Rep.

¶31,480 (Aug. 21, 2009).

5

CFTC Regulations may similarly be found at www.cftc.gov.

on or of any other office or division of the

Commission.

3

“D” owns 100% of “B” and 99.95% of “C”. “E” owns .05% of “C”.

4

See, e.g., CFTC Staff Letter 10-19 [Current Transfer Binder] Comm. Fut. L. Rep.

¶31,565 (May 5, 2010); CFTC Staff Letter 09-45 [Current Transfer Binder] Comm. Fut. L. Rep.

¶31,480 (Aug. 21, 2009).

5

CFTC Regulations may similarly be found at www.cftc.gov.

Page 3

If you have any questions concerning this correspondence, please contact Zachary J.

King, an attorney on my staff, at (202) 418-5364.

Very truly yours,

Ananda Radhakrishnan

Director